Tobin's q for Danish single-family houses

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Abstract

The rising price of single-family houses in Denmark and it's relation to the activity in the construction sector has given renewed interest in the theory of Tobin's q. Prices for single-family houses in Denmark have risen by 153 percent from 1993 to 2007 in real terms, with a particular steep rise from 2003 to 2006. The activity in the construction sector has been increasing too, but with some time lag caused by what seems to be an inelastic supply. In the long run, house prices will be determined by the replacement cost of houses, e.g. the cost of constructing a similar house including the cost of land. This can be used as a guide as to how much prices are to fall, in order to bring them back to the fundamental value. It can also be seen as a warning or indication of a price bubble. This paper presents a calculation of the value of Tobin's q for single-family houses in Denmark from 1968 to 2008. It shows that the value of Tobin's q has risen by around 40 percent from 2003 to 2006, caused by increasing house prices. This was not a sustainable development, and prices and the value of Tobin's q are now falling. In order for the value of Tobin's q to reach its fundamental value of 1, prices have to fall by around 25 percent from the current level, depending on how fast the downwards adjustment occurs. But an undershooting of the fundamental level is also possible, leading to even larger drops in house prices
Original languageEnglish
Publication date2009
Number of pages21
Publication statusPublished - 2009
EventISA International Housing Conference, University of Glasgow, Department of Urban Studies - Glasgow, United Kingdom
Duration: 1 Sep 20094 Sep 2009

Conference

ConferenceISA International Housing Conference, University of Glasgow, Department of Urban Studies
Country/TerritoryUnited Kingdom
CityGlasgow
Period01/09/200904/09/2009

Keywords

  • tobins
  • single-family houses
  • construction
  • prices

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